Tax Losses on Vacation Home Rental Limited Because of Excessive Personal Use Days.
(Parker Tax Publishing December 18, 2014)

After analyzing numerous trips to a vacation home to determine if they were for business or personal purposes, the Tax Court concluded that the taxpayer spent more than 14 personal use days at the property, thereby limiting rental use deductions under Code Sec. 280A. Van Malssen v. Comm'r, T.C. Memo. 2014-236.

Background

In March 2007, Mark Van Malssen and his wife purchased a vacation condominium in South Carolina. In 2008 through 2010, years in which they made the condo available for rental use by vacationers, they stayed in it on numerous occasions. Some of their stays were for personal use, others for business use (performing needed modeling and repairs), and some for a combination.

The condo was in use for a total of 81 days in 2008, 59 days in 2009, and 45 days in 2010. Included in the 2008 total was seven days of use by Van Malssen's brother. Van Malssen made the 350-mile trip from his home to the condo numerous times to perform remodeling and repair work and kept logbooks detailing his personal and business use.

He and his wife reported large losses for the rental activity on their 1040s resulting in deficiency assessments by the IRS of $19,198, $14,543, and $11,626 for 2008, 2009, and 2010, respectively.

Analysis

Generally, under Code Sec. 280A(c)(5), when a taxpayer rents a dwelling unit to others but also uses it a residence during the same year, the deductions attributable to the rental use cannot exceed gross rental income. Under Code Sec. 280A(d)(1), a dwelling unit is considered a residence if the taxpayer uses it for personal purposes for a number of days exceeding the greater of:

(1) 14 days; or

(2) 10% of the number of days during the year for which the unit is rented at a fair rental value.

Under Code Sec. 280A(d)(2), if a taxpayer uses a dwelling unit for personal purposes for any part of a day, that day is counted as a personal use day. But if the taxpayer is engaged in repair and maintenance of the residence on a substantially full-time basis for any day, that day is not considered a personal use day. Any personal use by a qualifying relative is imputed to the taxpayer.

Even if a taxpayer avoids having a dwelling classified as a residence, Code Sec. 280A(e) requires a taxpayer who uses the dwelling unit for personal purposes for even a single day during the tax year to limit his or her deduction for any rental activity by allocating expenses between personal uses days and rental use days. Days spent performing repairs and maintenance are disregarded when making the allocation.

The primary issue before the Tax Court was to determine the number of personal use days Van Malssen spent at the condominium for purposes of the Code Sec. 280A(c)(5) limitation on deductions and the Code Sec. 280A(e) calculations.

Although Van Malssen conceded that he personally used the condominium for 14 days in 2008 and 2010, he and the IRS disputed how to characterize:

(1) the days spent traveling to the condominium and

(2) his brother's use of the condominium in 2008.

Van Malssen argued, and the court agreed, that travel to the condominium to make repairs should not count as personal use days. Examples under Reg. Sec. 1.280A-1(e)(6), prior case law, and the plain language of the code indicated that Congress did not intend for days spent primarily repairing and maintaining a vacation home to count as personal use days. The court reasoned that, by extension, days spent traveling to the site where such work was to be performed should not count as personal used days either.

The court then analyzed Van Malssen's numerous trips to determine the principle purpose behind each, and thus the number of personal use days spent at the rental property. It accepted that 16 trips (between 2008 and 2010) were made principally to perform repairs and maintenance, and thus did not include any personal use days. But the court concluded that out of 12 trips made for mixed business and pleasure, only four were primarily for business (i.e, repairs and maintenance). Hence, the travel days associated with the eight mixed-purpose trips made predominately for pleasure counted as personal use days.

The Tax Court also concluded that the seven days of use by Van Malssen's brother in 2008 counted as personal use days. The brother was clearly a qualifying relative under Code Sec. 267(c)(4) and Van Malssen could not substantiate claims that the brother paid a fair rental price.

After completing its analysis, the Tax Court found that Van Malssen personally used the condominium for a total of 24 days in 2008, 19 days in 2009, and 16 days in 2010. Accordingly, the court held that the Code Sec. 280A(c)(5) limitation applied for all three years, and thus deductions attributable to the rental use were limited to gross rental income.

For a discussion of residential rental property, see Parker Tax ¶86,100. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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